Debt Relief Basics: Different Ways to get Debt Relief

Being highly indebted is a frustrating situation, particularly if the amount you owe is higher than your monthly earnings. The pressure to see your debts cleared and handle your duties as the family breadwinner could make you bear a heavy burden day in day out. To ease such situations, it is recommended to think through different debt relief services and choose the option that suits you best.

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Debt relief involves reorganizing debts in a different form or shape to offer the indebted person a measure of relief partially or fully. The process can take any shape, including reduction of the principal amount to be paid, extending the term of the loan, lowering the interest rates on the amount due, and more.

Generally, creditors only consider debt relief measures whenever the consequences of debt repayment default by the debtor are perceived as severe to the point that debt mitigation becomes the best option. Debt relief is extended to highly indebted parties. Such parties may include individuals, small businesses, municipalities, large corporations, and even sovereign nations. Here are the most common debt relief options.

1. Pay the debts on your own

The process of paying your personal debts requires you to assess your debts accurately, create a plan to get the debt paid off, and execute that plan effectively. You can call your lenders or your creditors to negotiate a repayment plan or request a lower interest rate.

Remember, you will be responsible for making monthly repayments to all your lenders. That means the specific approach and the specific time you make the payments is totally up to you. You should be ready to show valid documents to prove that you are in financial distress. If you successfully convince your lenders to accept your plan, there is a good chance you get better terms to meet your financial obligations successfully. This debt repayment option covers both secured and unsecured debts.

2. Consumer credit guidance

Based on the severity of your financial crisis, an experienced counsellor or credit counselling agency can recommend a specific debt management plan after reviewing your financial position. The credit counsellor will determine the amount you owe, how much you can safely pay within a specific period, and negotiate a reasonable repayment schedule with the lenders on your behalf.

The negotiation process could result in a more extended repayment period, lower monthly instalments, or lower interest rates depending on what you can afford. If your lenders accept the new repayment schedule, you will stop sending separate monthly payments to them. Instead, you will be making a single payment to the credit counselling agency every month. The counsellor will then distribute this amount to your debtors.

3. Consolidating your debts

This involves combining all your debts into a single manageable monthly payment. The primary benefits of this debt consolidation option is that it eliminates the higher interest rates of different debts, offers you an opportunity to be making a lower monthly payment, and allows you to focus on making a single payment every month.

You can consolidate all your debts by acquiring a loan from a credit union, bank, or other relevant sources. If you own a property and you have equity, you can acquire home equity loan and use the funds to repay your debts. Remember, this is a secured loan because you are required to secure them using your property equity as collateral.

4. Filing for bankruptcy

In case all other debt relief options fail, and you don’t have a stable source of income or any other way you could pay your lenders, the final debt relief option is filing for bankruptcy. Remember the details of your bankruptcy will remain in your credit history for many years. Besides, you may be unable to get credit for a few years, depending on the types of bankruptcy you opt for.

Wrap up

Every financial situation is unique and requires critical thinking to determine the most viable path for your financial future. Therefore, you may want to consult with a finance specialist who can analyse your financial situation carefully and help you choose the most appropriate debt relief option. After all, there is no need to file for bankruptcy if debt consolidation is a possible solution.

About the Author

Ankur Shah
Ankur Shah is the founder of the Value Investing India Report, a leading independent, value oriented journal of the Indian financial markets. Ankur has more than eight years of equity research experience covering emerging markets, with a focus on India and South East Asia. He has worked as both a buy-side investment analyst for a global long/short equity hedge fund and a sell-side analyst for an emerging markets investment bank. Ankur is a graduate of Harvard Business School. You can learn more about his latest views on global markets at the Value Investing India Report. -- He can be emailed at